Shorting stocks essentially reverses the “Buy low, sell high” rule. In a nutshell, via your broker, you borrow and sell shares of a stock that you expect to fall. You later have to buy them back (hopefully at a lower price) to replace them. So you’re aiming to sell high and then buy low.

Shorting stocks can be fun and profitable, but it’s risky:

In general, stocks and the stock market tend to rise over time, so you’ll be swimming against the current. Stocks in the S&P 500 have gained, on average, 9 percent annually between 1928 and 2012. Those who short stocks are betting against the odds and history.

Being wrong can be very costly. When you’re “long” in a stock, having bought it in the usual way, you can lose up to 100 percent of your money, but your gains could be huge — 100 percent, 500 percent or more. With shorting, if the stock falls to zero, your maximum gain is only 100 percent of your money. But if it keeps rising and you keep waiting and hoping, you can lose much more than your initial investment.

Being right doesn’t always work out, either. You might find a company that seems guaranteed to fail, with poor leadership, no profits, significant cash burn, a missing or shrinking competitive edge, scandals or investigations. Still, despite your very reasonable thinking, the company might remain in business much longer than expected, and its stock could even rise. The stock market isn’t always a sensible place, at least in the short run.

The costs are steep. Depending on the broker and the stock, you might face fees. If you’re using margin while shorting, you’ll be charged margin interest on your borrowings. And if the shorted stocks pay dividends, you’ll be responsible for paying them. That can add up.

The best way to make money in stocks is to buy high-quality companies at good prices and hold for the long term.

Ask the Fool

Question: What are “defensive” stocks?

Answer: Defensive stocks are tied to companies whose fortunes don’t fluctuate too much in relation to the economy. During a recession, people might delay buying cars or fancy jewelry, but they’ll still buy groceries, fuel, medicine, electricity and diapers.

Food, tobacco, energy and pharmaceuticals, for example, are defensive industries. They’re seen as more stable than their “cyclical” counterparts, such as the homebuilding, steel, automobile and airline industries. Cyclical industries aren’t necessarily to be avoided, but expect bumpiness.

The Motley Fool take

Brewing profits: Shares of Starbucks (Nasdaq: SBUX) advanced about 40 percent in 2013 and have averaged roughly 17 percent annually over the past decade. It’s still an attractive portfolio candidate.

With more than 13,000 stores in the Americas already, it’s reasonable to expect U.S. sales growth to slow. But there’s more to Starbucks. For one thing, it has a strong international presence, with much more room to grow. (It boasts more than 19,000 stores in more than 60 countries.)

Starbucks stores in China, for example, have been enjoying robust sales growth. The company opened 317 new stores there in 2013 and plans to open 750 in 2014. Management and investors have high hopes for India, too, as there has been a very positive customer response to Starbucks’ recent entry there.

Starbucks is also moving beyond coffee. It now owns and offers La Boulange bakery products, Evolution Fresh juices and Teavana teas. With Teavana, management believes that Starbucks can “do for tea what it’s done for coffee” by growing and expanding the tea industry and the tea bar concept while introducing a wide array of handcrafted tea beverages and tea-inspired food.

Meanwhile, Starbucks also offers its wares through supermarkets, and in recent years has introduced its Verismo single-cup espresso machine, its Starbucks Card mobile payment system, and more.

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